Do 0% Credit Cards Really Mean Free Money?

Credit card companies are once again offering free money - or it sure looks free when you see a huge 0% plastered on the envelope.

Open that new plastic, buy now and get 0% until August 2014? Yes, you're not imagining things. Credit card experts say we're seeing the best promotions for plastic ever since the Great Recession.

"It was free money to me in some sense," said Donald Grimes, an economist at the University of Michigan.

Grimes jumped at a 0% deal that runs 18 months to buy an Apple laptop. But he plans to pay off the purchase before an 18% annual percentage rate kicks in, retroactively on this deal, if the purchase is not paid off in 18 months.

"I've played that game, and I know how to do it," Grimes said.

MONEY QUICK TIPS: Make your credit cards work for you

The latest run of 0% offers - including 0% financing deals at stores and 0% introductory-rate major credit cards - is one more sign that the worst is over for the economy.

"The economy is definitely coming back, and the credit card industry is definitely making a bet on that," said Tim Chen, CEO of NerdWallet.com, which compares everything from credit cards to checking accounts to airline fees.

More jobs mean more people can pay their credit card bills. Credit card issuers are able to offer 0% rates to a significant group of consumers now because the expectation is that interest rates will remain low and the unemployment rate won't climb dramatically through the end of 2014. If that's correct, economists say, it would be awhile before rates increase appreciatively.

Banks also have so much in additional reserves that they have a good deal of money to lend, as well.

Yet do all those 0% deals mean we're heading back to the oh-too-easy credit days, when borrowers basically went on a bender? Not there yet, economists and credit card experts say.

The 0% offers are going to people who have good credit and are likely to make their payments, according to Greg McBride, senior financial analyst for Bankrate.com.

The deals aren't just for six months any more - again, indicating more optimism that the worst may be behind us. Some 0% rate deals can be strung out for 15 months, 18 months or even 21 months, depending on the offer.

But Grimes, senior research specialist for the U-Michigan Institute for Research on Labor, Employment and the Economy, said he is concerned about potential problems ahead after seeing the personal savings rate drop to 2.6% in the first quarter, compared with 4.7% in the fourth quarter last year.

Consumers could be stretching more, he said, to deal with a 2 percentage point increase in the payroll tax that began Jan. 1. Will some be tempted to borrow too much?

Right now, though, 0% could be a great deal for those who want to borrow and pay down old debt sensibly.

Better deals for consumers include:

- Slate from Chase is offering a 0% introductory rate until Aug. 1, 2014, on both purchases and balance transfers. More important, for a limited time, Slate also is offering a $0 introductory balance-transfer fee for balance transfers during the first 60 days the account is open.

- The Citi Simplicity Card has a 0% introductory rate for 18 months for purchases and balance transfers. The balance-transfer fee is $5 or 3% of the amount of each transfer.

- Capital One Prestige Card is offering 0% on balance transfers and purchases through August 2014. Balance-transfer fee is 3%.

- The Discover "It" card offers an introductory 0% rate for 14 months from the date of opening the account.

What's the best deal for you?

Will you be going out to buy new patio furniture with that 0% card? If taking on new debt, consumers would want to know what the payments would be each month so that they would be able to pay off their debt at 0% before the offer ends in 15 months or 18 months.

Simple math: Take the amount of the debt and divide by the number of months you have at 0%. So if you spend $6,000 on the card, you'd want to pay $400 a month to have that debt paid off in 15 months.

Are you struggling to take care of some old debt? If so, how much will you pay to transfer a balance if tackling an old balance is part of your strategy?

"The balance-transfer fee plays a big role," said Odysseas Papadimitriou,CEO of CardHub.com.

One reason the Slate from Chase offer is so appealing, Papadimitriou said, is that there is no transfer fee for the first 60 days the account is open. After that 60 days, the fee for future balance transfers is either $5 or 3% of the amount of each transfer, whichever is greater.

"It's very easy to get distracted by the length of the 0% offer," Papadimitriou said.

But typically, he said, an 18-month offer with a 3% balance-transfer fee is going to be more costly than a 15-month offer with no balance-transfer fee.

The balance transfer would add up to $150 if you'd transfer $5,000 with a 3% fee on some cards.

Make sure you understand what kind of debt can be transferred to a card, too. Slate from Chase will not allow consumers to transfer balances from store credit cards, such as a Macy's credit card.

And remember these cards can still go from 0% to 20%. Much of that will depend on your creditworthiness. The Capital One Prestige Card, for example, offers variable rates ranging from 10.9% to 18.9%. Those are variable rates that could go up once interest rates overall climb higher.

Consumers need to look at the big picture of credit, too.

If you are looking to refinance the house this spring or take out a new car loan now, think twice about jumping at 0% offers. You typically don't want to open a new credit card before applying for a major loan in the next 12 months, McBride said.

Understand that 0% on a credit card is not the same as making no payments for 18 months.

To keep that 0% rate, a card holder would need to keep up with making at least the minimum monthly payments, McBride said. If you are 60 days delinquent, you would lose the 0% rate. Ideally, you'd want to pay much more than the minimum payment to pay off that debt before higher rates hit.

The 0% rate could be a break for some consumers. But the trick is will they make time to pay off that debt?

"Use the 0% card to get out of debt faster, not as an excuse to spend more," Papadimitriou said.